Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

11/20/2012

One wonders what the SEC apologists will say post-Weber?

There is a contingent in the corporate law academy whose preference for federalization of corporate governance leads them to be kneejerk Delaware bashers and SEC apologists. Using the sex scandal aspects of the David Weber case to socre off them woul be cheap (albeit fun). But the allegations of serious misconduct, failure of internal controls, and whistle blower retaliation at the Securities and Exchange Commission are a different story:

Weber’s titillating testimony turns its focus on other executives within the Commission, including the COO and chair Mary Schapiro. Weber’s charges of nepotism and a lack of meaningful internal controls expose the risks that the Commission presented in its daily management of operations and beyond that as well. One does not need to read very hard to understand Weber’s belief that the SEC’s COO utilized a “pay to play” practice. Additionally, in a scene fit for the classic movie Dumb and Dumber, Weber asserts that SEC representatives brought highly sensitive computer code and encryption data to monitor activity on our equity exchanges to a hacker’s conference in Las Vegas. You cannot make this stuff up, folks.

Saving some venom for Ms. Schapiro as well, Weber paints her as a “LIAR” for perjuring herself during a presentation before the House and Senate Oversight Committee regarding the SEC’s bungled attempt to move to new office quarters. Weber would not be the first to label Ms. Schapiro with the big L. Recall that Attorney Richard Greenfield did just the same in the case brought on behalf of Standard Chartered v FINRA, Mary Schapiro et al.

What did Weber receive in return for running these tales of sex, lies, and stupidity up the chain of command? A pink slip, a defamed reputation, and much more. In his defense, Weber points out that an independent investigation by an Inspector General outside of the SEC who looked into charges made against him ultimately cleared him of allegations made against him by those inside the SEC.

If Weber's charges borne out even in part, how will the SEC's apologists be able to credibly continue to insist that the SEC can do a better job of regulating corporate governance than Delaware?

One thing's for sure, the SEC's apologiests won't be able to dismiss this as a one-off event. Not only does Weber's complaint allege pervasive internal controls, his allegations are not the only ones that have been lodged against the SEC.

In our audit of SEC’s fiscal years 2011 and 2010 financial statements, we identified four significant deficiencies in internal control as of September 30, 2011. These significant internal control deficiencies represent continuing deficiencies concerning controls over (1) information systems, (2) financial reporting and accounting processes, (3) budgetary resources, and (4) registrant deposits and filing fees. These significant control deficiencies may adversely affect the accuracy and completeness of information used and reported by SEC’s management. ...

We also identified other internal control issues that although not considered material weaknesses or significant control deficiencies, nonetheless warrant SEC management’s attention.

As the SEC continues pressing forward with enforcement of the internal controls provisions of SOX, something very amusing has come to light in a GAO report:

In GAO's opinion, SEC's fiscal year 2004 financial statements were fairly presented in all material respects. However, because of material internal control weaknesses in the areas of recording and reporting disgorgements and penalties, preparing financial statements and related disclosures, and information security, in GAO's opinion, SEC did not maintain effective internal control over financial reporting as of September 30, 2004.

Ouch! Mayhap the SEC needs to get its own house in order first? Or, at least, consult Matthew 7:3-5? It's a serious institutional embarassment for the SEC.

In sum, the current SEC leadership shouldn't be regulating a dog catcher operation, let alone the world's biggest capital markets.

BTW, if the SEC really is one of our finest agencies, as many prominent SEC apologists have claimed, what on earth must be going on at the bad ones? As for me, I'm filing this episode away in my list of reasons why federal agencies should not encroach upon areas of corporate governance traditionally relegated to state regulation.

Comments

One wonders what the SEC apologists will say post-Weber?

There is a contingent in the corporate law academy whose preference for federalization of corporate governance leads them to be kneejerk Delaware bashers and SEC apologists. Using the sex scandal aspects of the David Weber case to socre off them woul be cheap (albeit fun). But the allegations of serious misconduct, failure of internal controls, and whistle blower retaliation at the Securities and Exchange Commission are a different story:

Weber’s titillating testimony turns its focus on other executives within the Commission, including the COO and chair Mary Schapiro. Weber’s charges of nepotism and a lack of meaningful internal controls expose the risks that the Commission presented in its daily management of operations and beyond that as well. One does not need to read very hard to understand Weber’s belief that the SEC’s COO utilized a “pay to play” practice. Additionally, in a scene fit for the classic movie Dumb and Dumber, Weber asserts that SEC representatives brought highly sensitive computer code and encryption data to monitor activity on our equity exchanges to a hacker’s conference in Las Vegas. You cannot make this stuff up, folks.

Saving some venom for Ms. Schapiro as well, Weber paints her as a “LIAR” for perjuring herself during a presentation before the House and Senate Oversight Committee regarding the SEC’s bungled attempt to move to new office quarters. Weber would not be the first to label Ms. Schapiro with the big L. Recall that Attorney Richard Greenfield did just the same in the case brought on behalf of Standard Chartered v FINRA, Mary Schapiro et al.

What did Weber receive in return for running these tales of sex, lies, and stupidity up the chain of command? A pink slip, a defamed reputation, and much more. In his defense, Weber points out that an independent investigation by an Inspector General outside of the SEC who looked into charges made against him ultimately cleared him of allegations made against him by those inside the SEC.

If Weber's charges borne out even in part, how will the SEC's apologists be able to credibly continue to insist that the SEC can do a better job of regulating corporate governance than Delaware?

One thing's for sure, the SEC's apologiests won't be able to dismiss this as a one-off event. Not only does Weber's complaint allege pervasive internal controls, his allegations are not the only ones that have been lodged against the SEC.

In our audit of SEC’s fiscal years 2011 and 2010 financial statements, we identified four significant deficiencies in internal control as of September 30, 2011. These significant internal control deficiencies represent continuing deficiencies concerning controls over (1) information systems, (2) financial reporting and accounting processes, (3) budgetary resources, and (4) registrant deposits and filing fees. These significant control deficiencies may adversely affect the accuracy and completeness of information used and reported by SEC’s management. ...

We also identified other internal control issues that although not considered material weaknesses or significant control deficiencies, nonetheless warrant SEC management’s attention.

As the SEC continues pressing forward with enforcement of the internal controls provisions of SOX, something very amusing has come to light in a GAO report:

In GAO's opinion, SEC's fiscal year 2004 financial statements were fairly presented in all material respects. However, because of material internal control weaknesses in the areas of recording and reporting disgorgements and penalties, preparing financial statements and related disclosures, and information security, in GAO's opinion, SEC did not maintain effective internal control over financial reporting as of September 30, 2004.

Ouch! Mayhap the SEC needs to get its own house in order first? Or, at least, consult Matthew 7:3-5? It's a serious institutional embarassment for the SEC.

In sum, the current SEC leadership shouldn't be regulating a dog catcher operation, let alone the world's biggest capital markets.

BTW, if the SEC really is one of our finest agencies, as many prominent SEC apologists have claimed, what on earth must be going on at the bad ones? As for me, I'm filing this episode away in my list of reasons why federal agencies should not encroach upon areas of corporate governance traditionally relegated to state regulation.